Homebuying 101

While buying a new home is an exciting process, trying to learn a whole new vocabulary can be a bit overwhelming. From A to Z, this glossary should help familiarize first-time buyers with the home-buying terms you’ll need to understand as you move through the steps of purchasing and financing a new home.

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Glossary of Terms

Term

Description

Addendum

A written addition to a Purchase & Sale Agreement, or “contract,” to change or clarify terms.

Adjustable-Rate Mortgage (ARM)

A mortgage in which the interest rate (and therefore the monthly payment) can fluctuate up and down during the life of the loan. Depending on the specific loan terms, your interest rate may change every 6 or 12 months. Because the initial interest rate is often lower for an adjustable-rate loan, the monthly payments during the first few years may be lower than for a fixed rate loan. Some home buyers prefer the adjustable mortgage if they do not expect to stay in the home for more than a few years, or if they think interest rates are heading down.

Amortization

The process by which the balance of a loan is reduced through monthly principal and interest payments.

Appraisal

An opinion of the market value of a home expressed by a real estate appraiser.

Approval Conditions

Acceptance of the borrower’s loan application. Approval means the borrower meets the lender’s qualification requirements and also its underwriting requirements. In some cases, the approval may be conditioned on verification of additional information to be provided by the borrower.

APR (Annual Percentage Rate)

The total cost of a mortgage, expressed as a percentage of the loan amount. Unlike the base interest rate (which only includes interest), the APR includes all costs associated with your loan, including points, origination fees, private mortgage insurance, etc. Because different lenders charge different fees, looking at the APR is a good way to compare the total costs of loans from various lenders.

Capped Rate

A rate that has been “capped,” ensuring that the mortgage interest rate will not exceed a specified value during a certain period of time, even though it will fluctuate up and down below that level.

Close of Escrow

The date on which the deed to the property is transferred to the buyer and the buyer takes possession of the new home.

Closing Costs

Expenses incurred by buyers and sellers when a home is sold excluding the price of the home itself and the down payment. Common closing costs include points, prepaid interest, prorated property taxes (if any), escrow fees, title insurance fees, document recording fees, and real estate commissions.

Closing Disclosure (CD)

A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs). The Closing Disclosure is a new form under the new TRID Regulation.

Closing Statement

The financial disclosure statement that accounts for all of the funds received and expended at the closing.

Contract

See Purchase & Sale Agreement

Conventional Financing

Financing that is not insured by a government agency (such as the FHA or the VA).

Convey

To transfer title or an interest in real property by means of a written instrument such as a deed or assignment of lease.

Covenants, Conditions & Restrictions (“CCRs, or Declarations”)

Simply stated, CCRs are the rules of living in a given neighborhood. They are recorded at the county courthouse for the property and apply to all homeowners within that neighborhood. Some examples of items included in the CCRs might be restrictions on exterior paint colors or improvements, requirements to keep landscaping maintained, and the like. CCRs, when enforced by the Homeowners’ Association, help protect property values in a neighborhood.

Credit Report

A report from an independent credit-rating service (such as TRW, Experian or Equifax) listing all of a borrower’s current obligations to various creditors, including credit card payments, car payments, student loan payments, etc. The report shows how much is owed, as well as whether your payments are made on time. A credit report is a required document during application for a home loan.

Debt-to-Income Ratio

The ratio of monthly debt payments to monthly gross income, which is used to qualify a buyer for a mortgage.

Declaration of Condominium

The legal document that creates a condominium Homeowners’ Association. This document contains most of the important information about how the association will operate such as what Covenants, Conditions and Restrictions exist, how dues will be collected, what authority the association has, etc.

Deed of Trust

The document that pledges the subject property as collateral for the repayment of the loan.

Down Payment

The portion of a home’s purchase price paid by the buyer at closing. Often, the down payment is expressed as a percentage of the total purchase price.

Earnest Money (Deposit)

The money paid by the buyer at the time of contract “in good faith” to assure performance of a contract.

Easement

A right given to a third party to use or access a portion of property for certain purposes, such as electrical lines or water mains.

Elevations

The exterior face of a home or a drawing depicting the exterior view.

Equity

The difference between a home’s value and the mortgage amount owed on the home.

Fannie Mae

One of two federal agencies that purchase home loans from lenders (the other being Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.

FHA Loan

A mortgage insured by the Federal Housing Administration (FHA) which offers low down payment mortgages to buyers (terms vary county by county).

Fixed-Rate Mortgage

A mortgage in which the interest rate (and therefore the monthly payment) remains the same for the entire life of the loan. Thirty-year and 15-year fixed-rate mortgages are industry standards. Many home buyers prefer a fixed-rate loan because the principal and interest payment amount never changes.

Floor Plan

An architectural drawing showing the overall layout of a home.

Framing

The construction of the skeleton structure, or framework, of a house.

Freddie Mac

One of two federal agencies that purchase home loans from lenders (the other being Fannie Mae). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.

Funding

To provide funds for the payment of interest principal or debt or the source or supply of funds, generally used for a specific purpose or project.

Hazard Insurance

An insurance policy that protects the property against damage caused by fire, wind, or some other hazards. In the case of an attached condominium, the Homeowners’ Association will include hazard insurance on the structure and the homeowner should obtain separate insurance coverage for the contents of the home. In the case of a detached (i.e. single-family) home, the buyer will be required to show proof of hazard insurance prior to the close of escrow.

Homeowners’ Association (HOA)

The Homeowners’ Association is responsible for enforcing the Covenants, Conditions and Restrictions and rules of the community, and also for the maintenance and upkeep of any common areas such as parks and landscaping. A fee is paid by all homeowners in the community to pay for the activities of the HOA. This fee varies from community to community, depending on whether the community consists of single-family homes or attached condominiums and the extent of the community’s common areas.

Impound Account

Depending on the type of the loan, some lenders increase the size of the monthly payment to cover important bills such as property taxes and insurance. When the taxes or insurance premiums are due, the lender automatically pays the bill from the buyer’s account.

Interest

The amount is added onto your loan (in dollars) to cover the cost of borrowing money to finance your home. The “interest payment” is the portion of your monthly payment applied against the interest owed. At the beginning of your loan period, the majority of your monthly payment is applied against the interest. But over time, more and more of the payment is used to reduce the amount of principal owed. (For most people, a portion of their annual mortgage interest payment is tax-deductible. Consult your tax advisor for details.)

Interest Rate

The cost of borrowing, expressed as an annual percentage of the principal. Many factors influence the interest rate you will be charged, including the overall state of the economy, the lender’s costs, etc.

Loan Application

An application by an individual or group of individuals to borrow money.

Loan Estimate (LE)

Provides a summary of the key loan terms and costs. The form shows the basic loan terms (e.g., the principal and interest payment and loan costs) and figures that provide borrowers with affordability information (e.g., the total estimated monthly payment and estimated cash required to close).

Loan-to-Value (LTV) Ratio

The ratio of the amount of money owed on a home to the home’s value. The difference between these two figures initially is the down payment.

Mortgage

A loan for the purchase of a home. Mortgages are available from banks, savings & loans, credit unions, mortgage companies, etc.

Mortgage Interest Deduction

The ability of mortgage borrowers to deduct interest paid on a home loan for purposes of income taxes. Consult your tax advisor for details.

Mortgage Payment

The total amount of your monthly mortgage payment. Principal and Interest (P&I) are due on every loan. Taxes and insurance (T&I) are also included if the lender requires an impound account.

New Home Orientation Tour or “Buyers Walk-Through”

A pre-planned meeting, lasting approximately 2 to 4 hours, scheduled to take place upon construction completion where the purchaser(s) meets their warranty service representative and walks through their new home. The purpose is to orient the buyer to his or her new home, show how to operate all appliances and provide information about the home warranty.

Non-Conforming Loans

A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae, and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.

Option

An item in a home that is not a standard feature.

PITI (Principal, Interest, Taxes & Insurance)

The total amount of your monthly mortgage payment. Principal and Interest (P&I) are due on every loan. Taxes and Insurance (T&I) may also be included if the lender requires an escrow account.

Points

Also known as discount points, a fee charged by the lender to fund a loan, in addition to and separate from other fees charged. One point equals 1% of the amount of the loan. Discount points are charged or are received based on the note rate the borrower selects.

Pre- Qualification

The process of reviewing a prospective borrower’s credit and payment capacity prior to approving a loan.

Principal

The amount of your loan (in dollars), excluding interest. The “principal payment” is the portion of your monthly payment applied against the principal. In the first several years of your loan, only a small amount of the payment is applied to the principal due to interest charged. As time goes on, more and more of the payment is used to reduce the amount of principal owed.

Private Mortgage Insurance (PMI)

A type of insurance that protects the lender in case the borrower defaults on the home loan. This is paid monthly by the home buyer, as a part of the monthly mortgage payment. PMI is usually required by lenders if the borrower makes less than a 20% down payment.

Property Management Company

A company devoted to the leasing, managing, marketing, and overall maintenance of the property of others. The property management company performs three basic functions.

o Fiscal Management – of financial affairs

o Physical Management – of structure and grounds

o Administrative Management – of files and records

Punch List

A written list created during the New Home Orientation Tour of any items that do not meet the Warranty Performance Standards, as described in the Welcome Home Manual.

Purchase & Sales Agreement

A written document in which the purchaser agrees to buy and the seller agrees to sell certain real estate under stated terms and conditions. Also called a sales contract, earnest money agreement, or agreement for sale.

Standard Features

Items that are automatically included when you purchase your new home.

Temporary Buy-Down

A payment to the lender from the seller, buyer, third party, or some combination of these, causing the lender to reduce the interest rate during the early years of a loan. This results in lower mortgage payments during the buy-down period. A temporary buy-down usually affects the first 1 to 5 years of the loan.

Title

A legal document establishing the right of ownership of property.

Title Company

A firm that ensures the title, or actual legal document of ownership, on a property is clear and that provides title insurance.

Title Insurance-Owners Title Insurance-Lenders

Insurance to protect the buyer and lender against losses arising from disputes over the ownership of a property.

TRID

TRID is an acronym for the TILA-RESPA Integrated Disclosure rule. Any loan applications taken on or after October 3rd, 2015 fall under TRID, and therefore require new documents including the Loan Estimate (LE) and the Closing Disclosure (CD). The purpose of TRID is to improve the mortgage loan settlement process for consumers.

Underwriting

The process of evaluating a loan application to determine whether it meets the lender’s standards.

Upgrade

An option for a buyer to select, at an additional cost, features other than the standard features available. May include such items as hardwood flooring, carpets, carpet pads, or vinyl flooring.

VA Loan

Loans that are backed by the Veterans Administration (VA) and that offer several benefits to buyers. VA loans are available to active members of the armed forces, as well as to veterans and widows of veterans.

VOD

Verification of Deposit (Form 1006) Form used to verify the cash deposits the applicant listed on the loan application.

VOE

Verification of employment.

Warranty Deed

The warranty deed (also known in California as a grant deed) is a form of insurance for the buyer. In effect, this type of deed guarantees that the property he or she is buying belongs to the seller free and clear and is not the subject of any claims by third parties. If a claim is presented to the buyer after the transaction is closed, the seller who has issued the warranty deed is legally responsible for compensating the buyer for any damages or collection actions.